EUR/USD
The Euro consolidated around 1.34 ahead of the ECB interest rate decision on Thursday as trading slowed to a crawl. The net outcome was in line with consensus expectations as the central bank cut the main financing rate to 1.00% from 1.25%, matching record lows, although the vote was not unanimous with some members preferring to wait.
There was a reduction in GDP growth forecasts by the ECB and there was general pessimism surrounding the outlook. The central bank announced that it would introduce new three-year repo operations to provide long-term liquidity to the banking sector. There was also a relaxation in collateral conditions to allow a wider range of securities.
There were very important comments surrounding bond purchases with Draghi maintaining the orthodox line that it was not the ECB’s role to provide monetary financing for government deficits. These comments seriously dampened market expectations that the ECB would be willing to provide increased support and the Euro dropped sharply following the report as Italian yields spiked higher. It remains to be seen whether there will be a change in tone following the Summit.
The US economic data was better than expected with a drop in jobless claims to 381,000 in the latest week from 402,000 previously and this provided a brief boost to risk appetite, but the impact was quickly overshadowed by the ECB press conference .
As EU Leaders gathered for the Summit meeting, there were further tensions surrounding the introduction of majority voting for the ESM which is due to replace the EFSF in 2012. A draft agreement indicated that any Treaty changes would be limited to the 17 Euro-zone states rather than the 27 EU members. There was also an agreement that the ESM should not be given a banking licence while bailout decisions would be taken on a 85% majority.
Underlying confidence remained fragile on fears that Summit agreement would not be sufficient to provide relief and the Euro retreated sharply to re-test lows below 1.33 as risk appetite deteriorated before recovering slightly.
Source: VantagePoint Intermarket Analysis Software
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Yen
The yen maintained a firm tone against the dollar on Thursday as the US currency dipped to lows near 77.10 early in New York trading. There was some recovery in the dollar later in the session as it rallied back to the 77.70 area while the Euro remained generally on the defensive.
The trading pattern was different from recent sessions as the yen held firm when risk appetite was firm and the very tight correlation with the dollar faded slightly as the dollar was also able to advance against the yen as the Euro fell.
Third-quarter Japanese GDP rose a revised 1.4% from 1.5% previously as capital spending estimates were downgraded slightly, although the underlying impact was limited.
Sterling
There was no surprise from the Bank of England on Thursday as interest rates were left on hold at 0.50% while the quantitative easing amount was also unchanged at GBP275bn. As usual when there is no policy change, there was no statement by the MPC.
Sterling edged higher following the decision and pushed to highs above 1.5750 against the dollar before retreating sharply later in the US session. The UK currency was undermined by a general flow of funds into the US currency with lows near 1.56 as it held firm against the Euro.
There will be speculation of political isolation surrounding the EU Summit and, much more damagingly, there will be fears that the UK economy will be damaged severely by any Euro-zone break-up. Safe-haven demand for Sterling will continue to be a key component and there will be expectations of further defensive inflows despite fears over the UK outlook. The principal feature is likely to be a sustained increase in volatility.
Swiss franc
The dollar briefly dipped to lows below 0.92 against the franc on Thursday before quickly regaining ground. The currency was still blocked in the 0.93 area as progress was dampened by a firmer franc tone against the Euro.
There was some disappointment that the National Bank had not moved to weaken the franc and the ECB rate cut also provided some support for the franc, although the net impact was measured.
There will be caution ahead of the central bank monetary meeting next week with further speculation that there would be an adjustment to the peg or a move to negative interest rates.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar moved higher in early US trading on Thursday and spiked to highs just above 1.0350 against the dollar as risk appetite improved following the US jobless claims data. There was then a sharp reversal in trends and the currency fell sharply to lows near 1.0150.
There was further selling pressure in local trading on Friday as regional equity markets remained on the defensive and there were uncertainties surrounding the EU Summit. Wider concerns over the Asian growth outlook were also important in dampening Australian currency demand.
